While there are myriad perspectives on sustainability and corporate responsibility, each with its own unique value, I often find myself focusing on sustainability’s operational aspects: what can we do to increase the pace at which belief in sustainability translates into concrete actions that benefit the environment, society, and business? To me, a key question is how we get more done, how we “hard wire” sustainability into the way businesses operates.

The time is right to focus on the how of increasing sustainability because so much great work has already been done on the what over the years, and sustainability has come to be so well-known in business. For example, the concept of the triple bottom line (social, environmental, economic) is now decades old, and it has been remarkably successful at becoming part of the thinking of businesspeople. (There is, however, a long way to go in terms of becoming fully integrated into the day-to-day operation of businesses, as we will discuss later.)

While in years past sustainability and responsibility efforts had to fight being perceived as distractions, surveys now routinely find it is perceived as important—for example, one found that 93 percent of CEOs see sustainability as important to their company’s future success. In this context, it makes sense to me that our primary challenge is less about raising awareness of sustainability and responsibility and more about raising the level of action related to it.

Part of raising the level of action is addressing issues that frequently stand in the way of businesses doing more. While there are many barriers, I believe a core issue is the tendency to see sustainability as separate from the business, rather than as integral to how it creates value. This has two key components:

• Cultural: Sustainability being seen as not as rigorous or financially valuable as other areas of the business
• Conceptual: Sustainability being seen as tangential, or as outside of the core of how the business creates value

Separation from the business

The response to this perceived disconnect between sustainability and the business can be twofold: First, to demonstrate that sustainability is being run with the same culture of performance (e.g., rigor, focus on value) as the rest of the business; second, to illuminate the links between sustainability and the value-creation engine of the business.

One effective way to address the culture of performance aspect is to run sustainability programs with the same management rigor and focus on value, meeting the same business case requirements and using the same performance improvement processes as the rest of the business. Over the years, many studies—and my personal experience—have found that one of the top barriers to doing more around sustainability is the difficulty of demonstrating the business case.

As just one example, a report commissioned by the Institute of Chartered Management Accountants states that sustainability will only be embedded in an organization if it is supported by a robust business case linked to tangible benefits.

I’ve spent over a decade trying to address this specific issue, in particular working on how to better measure and grow the true value sustainability produces for an organization. In my experience, better valuation of sustainability’s benefits produces two key benefits: Proving and Improving. Proving the value sustainability brings is important: first, because a business that underestimates the value of sustainability may then underinvest in it, and, second, because the act of quantifying and valuing benefits can bring sustainability efforts in line with the rest of the business, where that kind of value-focused analysis is a core activity.

The reason that not proving the benefits of sustainability normally results in underinvestment is simple: people’s intuitive sense for how much value sustainability provides typically produces an estimate that is too low—much too low. In my experience, when we have finished finding all the “submerged value” that sustainability provides but the company hadn’t previously seen, the actual value produced by sustainability is often 1,000% as much as previously believed. As you might imagine, businesses are frequently investing much less than they would if they saw sustainability as ten times as valuable than they currently do.

Measurement may not only result in increased ability to prove sustainability’s value, but also to improve it. The old saying, “you can’t manage what you can’t measure” is as important to sustainability as it is to other parts of the business—if the business believes that sustainability efforts can’t be measured well, and therefore managed well, sustainability may not have an equal seat at the table. For this reason, breaking down the measurement barrier also leads to breaking down part of the wall separating sustainability from the business.

In addition to helping convince the business that sustainability can be improved through the same processes as the rest of the business (e.g., Six Sigma and related methodologies, which rely heavily on measurement), there is evidence that measurement improves the outcomes of sustainability and responsibility efforts. For example, one report found that:

• Measurement, to an extent, is its own reward: it encourages improvement, management, and the explicit formulation of assumptions and expectations. It should be viewed as a process whose greatest value is achieved by organizations that learn from evidence amassed over time.

Similarly, another study found that responsibility practitioners running volunteer programs saw greater success when their programs used measurement and that both they and senior executives at their companies believed that measurement and evaluation was key to program success:

• Both CR/volunteer managers and senior executives agree that Measurement and Evaluationis key to the success of their volunteer programs….CR/volunteer managers from companies that measure and/or evaluate volunteer events/activities rate their programs more successful than the programs of their peers whose companies do not measure and/or evaluate.

Connecting to the value generation engine of the business

One reason people often intuitively believe that sustainability is not profitable is that they cannot see how it is connected to the way the business generates value. While saving money on the business’s energy bills, for example, is clearly good, it is not a core part of how most businesses compete. For the majority of firms, their competitive position is primarily about something else, such as product differentiation, brand strength, innovation, or overall low cost (primarily driven by controlling other types of costs besides energy, such as labor and materials). To the extent that sustainability’s benefits are seen as tangential to the core of the business, that perception affects efforts to embed it in the business.

One way to address this is to make clear how sustainability is, in fact, tied to the core ways the business creates value. For example:

Product differentiation: Many products and services are seen by buyers as commodities—that is, as not very differentiated from the competition’s (in spite of companies’ best efforts to differentiate them). Increasing numbers of buyers have begun including sustainability in their buying decisions—for example, the economic activity of organizations with supplier sustainability programs is well into the hundreds of billions of dollars, and many leading industries have groups of firms that are advancing sustainable purchasing, such as Practice Greenhealth in the health care space.

Innovation: Intuitively, it makes sense that including sustainability in a company’s thinking would help it to be more innovative—change the way you think and you change the way you create—and there is increasing evidence that this is the case. Research I led, for example, found that companies that were sustainability leaders were much more likely to be innovation leaders than those that weren’t—400% more likely, in fact.

Overall costs: Sustainability provides a lens that can help identify waste, whether tangible (e.g., material) or intangible (e.g., wasting existing goodwill or wasting the opportunity to develop more of it). Often by following the carbon emissions of a business, for example, companies find wasted material or effort, which leads to identifying opportunities for increased efficiency within the supply chain.

As just one example, suppliers may be sending products to stores over-packaged, costing the suppliers money in materials and the stores money in labor. Fixing this requires little if any investment and can yield millions of dollars in savings, generating a very strong ROI. This may be why research on sustainable supply chain projects finds they deliver such a high return on investment–such as ROI figures well in excess of 100%.

Brand: While there are multiple factors that go into brand strength, many companies see brand protection as one of the values provided by sustainability. For firms whose key advantage is brand strength, this means sustainability can be a way to reduce the risk of damage to that key asset.

Removing impediments to action

If we take the perspective that sustainability is not separate from the business, and that not only should it be “hard wired” into the business, but also that it already is, that can help change how businesses behave. In doing so, we can help businesses create more value, not only for themselves but also for the world.

A little while ago, Wired magazine’s Jeff Abramowitz took a look back at how Wi-Fi, the now-ubiquitous wireless internet system, came to be the way we all remotely connect. It’s a complex tale, as computers were still plugged into walls and cables, a lot of internet access depended on phone lines, businesses and consumers were working with different systems and so on. It was chaotic, to say the least.

The industry players — the large manufacturers of hardware, software, chipmakers, and so on — hadn’t yet agreed on which system was best. The great VHS vs Beta battle for the soul of videotape had a similar ring — but nowhere near the impact — of this epic struggle. And this all happened only twenty years ago this September!

Abramowitz compares this period to a digital ‘wild west’ wherein “one vendor could build ‘standards-compliant’ products that weren’t fully compatible with ‘standards-compliant’ products from another. These weaknesses in the international specification led companies to support rival technology consortia, each aiming to become a de facto standard.”

Right. Exactly, there was a hole in the system. We needed a standard. A universal standard makes it easier to focus on real impact; to allow everyone to get on with manufacturing their next generations of goods and services. To allow the whole industry to move forward.

By September 15, 1999, when the 17 major digital players finally got together in a room to back Wi-Fi, this was well understood and, as Abramowitz notes dryly, “there was no lack of enthusiasm in that room.”

It’s easy to see why, as we’re all still grappling with manufacturers using different types of screwheads. With Europe, Asia and the US wiring their electrical systems differently. With some countries driving on the left, some on the right. And with at least one major country continuing to resist universal adoption of the metric system. Mercy!

There is yet another major arena with an analogous situation: Plastic neutrality. Similarly, this is a new arena, one that is urgent for the world and that is struggling to find a meaningful standard in time for the big players to all get on board together.

Thus far, the standard has simply been pound-for-pound reclamation of any plastic in place of any type of manufactured product. But this is clearly flawed, just as Wi-Fi’s predecessors were.

What about plastics that are currently in a wetland channel, on their way to the sea…are they equivalent to a ton of the same material currently lying next to the highway in Montana? What about a ton of just-manufactured micro-plastic versus a ton of intact PET in the back room of a supermarket? There is more to the true impact than weight and volume.

Type, condition, toxicity, likely destination, economic impact and probable longevity in the environment — all these go along with the amount of plastic to create a real, meaningful, useful standard that all can adhere to.

For almost two years now, Valutus has been grappling with this and we’ve been developing a plastic standard that includes all of these impacts, a standard we call True Plastic Impact (TPI).

Let’s take the condition of the plastic involved. Currently a company can manufacture a ton of pristine plastic objects that happen to shred easily into shrapnel-like particles in the environment. Perhaps they’re designed for boats and generally end up in a waterway. And these fragments may complete their cycle in the digestive tracts of marine animals and, ultimately perhaps, in humans.

Yet currently, as long as the company finds and recycles a ton of plastic somewhere, whether similar to the one they used or not, they are considered ‘plastic neutral.’

To accelerate actual, meaningful action on plastic, companies need to understand and manage the true impact of their plastic use.

For us the True Plastic Impact calculation looks like this:

Those reading this article are likely doing so using Wi-Fi because all agreed that it was the best, most workable and universal option. The existence of a standard makes more action happen faster. It helps create the acceleration of action we saw when areas such as DVDs and green buildings adopted their own widely used standards. (About a year after Blu-ray defeated HD DVD, Blu-ray player sales nearly doubled.) For this reason, we believe it’s urgent that we all get quickly to a workable, meaningful plastic impact standard – and a more credible, comprehensive standard makes that happen faster.

Fundamentally, standards that consider all plastic to be the same (“mass-balance” approaches) create a credibility problem, since people know that isn’t the case. That holds back adoption and progress.

TPI doesn’t have this issue. As plastic waste expert Joao Sousa says:

Plastic waste is a big issue, and its impact needs to be measured accurately. Unfortunately, most plastic impact measures rely heavily or exclusively on weight and don’t include other factors that matter, such as location and toxicity.

The True Plastic Impact measure developed by Valutus is an exception and is the most comprehensive measure I have seen. 

— Joao Sousa Programme Lead, Plastic Waste
Leader, The Marine Plastic Footprint Report
IUCN

For more detail about True Plastic Impact, or to join the companies who are already using it, contact us or go to www.plasticstandard.com.

Yet how many sustainable initiatives die on the corporate vine because the earnest and hardworking CSO didn’t present this unsurfaced value to her skeptical CFO? We don’t know for certain but, based on the daily wailing and gnashing of teeth we encounter, a lot.

Submerged Value

Latent consequences are what we call Submerged Value, and it is high time this deep well got its due. It’s a critical part of impact science, our term for the full effect an organization has on the world.

There’s the company, for example, that built several LEED stores to help control energy costs. Energy savings was the ‘manifest,’ planned consequence. What they discovered afterwards was that the types of changes that go into LEED buildings led to more customers because, without knowing why, people felt better in those stores.

Then there was the manufacturing company that looked at the benefits of reducing industrial waste because they thought it would lower their purchasing and disposal costs. It turned out, however, that there were at least a dozen additional benefits that they had never considered, benefits that were unseen without thinking carefully about secondary and tertiary effects of the original action.

For example, there were lower warehousing costs due to managing less material, reductions in processing and insurance costs — all accompanied by an increase in working capital. These benefits were concrete, real, and significant, but had not been factored into their calculations or their investment request.

And consider the case of the large pharmaceutical company donating medicine to communities in Africa as a centerpiece of their CSR program. One would assume health outcomes would improve when pharmaceuticals are available — that is to be expected.

But there is another beneficial outcome, one the company did not foresee: improved gender equity. The U.N. tells us that when household members are sick, it’s usually a girl who stays home to care for them. Therefore, if there are fewer sick people, girls can attend school more frequently, which in turn – the U.N. again — contributes greatly to gender equity. These are, in Merton’s words, ‘latent’ or unexpected consequences.

Okay, some say, that’s good, but it just kind of happened that way, that’s why they’re unintended, right? Not in our book. Such things can be planned for, and values assigned to them, in advance. It’s a matter of asking the right questions, putting on the SCUBA gear in the planning stages, in order to raise this fountain of value to the surface.

In fact, it’s urgent we all use this approach. We’ve detailed in this space how difficult it is to break through the grass ceiling — to ourselves be properly valued — in the halls of power where thumbs up or down is all the difference. Submerged value can make that difference.

Valutus has been baking this metric into our valuations and tools for decades in order to present as realistic a snapshot of true outcomes as possible. In the process we often hear things like, “Whoa. I never thought of that before. But, now that I see it, it’s obvious.”

“Gender equity in Africa because girls have more freedom to attend school when there’s medicine?” Of course, right, it’s obvious now.
“Lower across-the-board costs and higher yields with reduced industrial waste?” Sure, naturally, had it in our back pocket the whole time.”
“Customers like being in our LEED buildings more?” Yeah, a slam dunk!

We’re not saying this is simple; even leading organizations miss this stuff. We checked the reporting of companies with large, longstanding, sophisticated medicine donation programs and found nary a one that even mentioned gender-equity impacts. This is why we call these benefits submerged, because they’re very difficult to see unless you know where and how to look.

There are questions and tools, however, that can dredge submerged value to the surface. But how much is all this trouble worth? Where’s the payoff?

We know from experience that if sustainability’s value can be increased just 25% through raising submerged value, a bunch of important projects that were borderline before may now get a thumbs up. And if 50% is submerged, and we can dredge it up? What if, as we’ve found, submerged value is often three times as much as visible value? How much sustainability would get done once the word got out that it frequently has four times the value originally thought?

We’re not saying this is child’s play. But neither is it impossible, as some have said. So far, in two decades of valuation, there has never been a case where we could not raise significant submerged value to the surface.

Additionally, in that span, the submerged value has never been lower than 25% of the total value of sustainability, and it is usually 50% or more. Pretty unexpected, right? We were shocked, too — at first.

We’ll talk more about this in our next issue, including why so much value is submerged and how to surface it, but first we’ll throw this question out there: what if a project’s submerged value were actually greater than its ‘manifest’ value…is that possible?

What’s that…you can’t wait? Okay, here’s a quick morsel: when a municipality adopted green building policies for its public facilities, research found that it led to a 90% increase – almost double – in the number of private sector green buildings that were built. Yes. It’s more than possible.

Want to dive into submerged value? We do that here. Bring your SCUBA gear!

Continued…

Previously, we discussed Submerged Value and made a point of noting how significant a chunk of the total value of sustainable actions it represented. We closed with the rather bold statement that often, submerged value actually rivals — or even exceeds — visible value.

Well, we’re here now to back that up. Over more than two decades of working on measurement and valuation, we keep confronting a shocking result: submerged value isn’t just a nice add-on that rounds up the project’s visible benefits. Often, it’s the majority of the project’s value.

Consider the story of a hospitality company with tens of thousands of employees. They’d been active in sustainability and CSR for years, and the executive in charge was highly experienced and respected.

The company knew sustainability and CSR activities were something employees liked, but they’d never been able to quantify their effects. As a result, when looking at the business benefits of their initiatives, they tended to focus on things like energy savings, for which they had good numbers. That meant that the ROI of sustainability and CSR wasn’t huge (though it was positive).

I asked the executive how much she believed the talent-related benefits of her sustainable activities were worth – that is, the value of these activities on things such as employee attraction and retention.

Now, I’ve asked this question of many, many companies over the years and had very few quantitative answers. The most common response, by far, is: “No idea. We’re not even sure how to answer that question.” Unfortunately, because “we don’t know” can’t be entered in a spreadsheet, the ROI value of something unknown is assigned the only value it can’t possibly have: Zero.[1]

But to her credit, this exec didn’t say, “I don’t know.” Instead, she estimated the value at about $3 million per year. She made it clear, however, that the company’s C-Suite would put the value at about $300K, ten percent of her estimate. This was very instructive.

First, it wasn’t good if C-Suite execs thought sustainability and CSR activity was worth so much less than she did.

Second, the number she believed they’d support was very small. Her estimate of $3 million isn’t much for a multi-billion-dollar company, but $300K? That’s tiny for an organization that large, so small that many executives wouldn’t bother with any activity that size, let alone budget much money for it.

Third, this allowed us to determine the percentage of sustainability’s talent-related value that was submerged. Once we determined the full value of the benefits, we could subtract her estimates, and the difference would show us how much value was submerged. 

We used conservative assumptions, which is our standard practice, since it shows we’re taking the analysis seriously, not just making up numbers that support our point of view. An added benefit: if we can make the case for sustainability or CSR using conservative numbers, any additional benefit is just a bonus.

As an example of our use of conservative numbers, published research has shown social responsibility leadership resulting in a reduction in employee attrition of 25%-30% or more. In our calculations, we went with 10%.

It is also our standard practice to do the calculations together with executives, rather than doing the calculations and then trying to convince them our numbers are right. Using our interactive Talent Benefit ValuationTool, we sit with executives and help them enter numbers that make sense to them, so they’ll feel more comfortable with the results.

Returning to the hospitality example, the result of calculating the true value of sustainability and CSR efforts for talent-related benefits alone was about $30 million per year, or ten times what the executive had estimated, and 100 times what she thought her C-Suite would assume. In this company’s case, the vast, vast majority of value was submerged.

When we get a result like that, the typical first response is, “Wow! That’s a lot more than we thought!” This is usually followed closely by, “we must have put an incorrect number in here somewhere!”Both responses are legitimate. It’s often the case, with a result so dramatically different from expectations, that the calculation is wrong. Therefore, our approach is not to argue — at all. We simply go through the calculation and offer to change any number in it.

Once we do that, the tool updates its calculation instantly and executives see that, while the total changes, it’s not enough to change the obvious conclusion: that sustainability is being greatly undervalued. For example, in a case like this one, the value might drop from $30M to $28M. That’s less, but it is still enormously more than previously believed.

At this point, we’re often asked to change a second number, and again the total changes somewhat, but the conclusion does not. Perhaps we’re asked to make a third change, meaning we’ve now reduced three numbers (numbers that were already conservative) – but, just as before, while the final value goes down it’s still many times what was previously thought.

In the example above, even if the value dropped to $25M, that’s still more than eight times as much as the executive previously thought, and 80 times her estimate of what the C-Suite believed.

So, stepping back from this specific corporation for a moment, what general lessons can we take from this?

First, it’s certainly clear that surfacing and quantifying submerged value matters. If executives believe sustainability’s value is much lower than it really is, what’s the likelihood they are investing the proper amount in sustainability and CSR programs? Second, it’s also clear that using interactive tools, and a we’re-doing-this-together approach, matters too.

Third, we need to welcome the chance to talk about value. Sustainability and CSR are much more valuable than people believe because most of that value is submerged. Surfacing and quantifying that value matters. A lot.

References:
[1] MIT Professor John Sterman